Public Service Pensions rectification update

The rectification is the result of the Court of Appeal judgement in the McCloud and Sargeant cases. These ruled that the transitional protection offered to certain members of the pension scheme gave rise to unlawful discrimination.

The Government accepted that the same issue applied to all Public Sector schemes and has been working to fix the discrimination identified. Essentially, those nearer their normal retirement age could stay in the legacy schemes whereas other, younger, members were forced to move to the 2015 schemes, and this was ruled as discrimination.
 
To rectify this, the same transitional protections are being offered to all members who were in service on or before 31 March 2012 and on or after 1 April 2015, whether they are currently an active, deferred or pensioner member.
 
A consultation outcome earlier this year confirmed that the schemes would implement what is known as a “deferred choice underpin”. With the deferred choice underpin option, members will initially be reinstated into the legacy scheme but given the option at retirement to choose to access benefits using the reformed scheme rules, so deferring the choice until retirement.
 
To achieve this the Government introduced the Public Service Pensions and Judicial Offices Bill (PSP&JOB) to Parliament on 19 July 2021. This legislates how the government will remove the discrimination identified by the courts.
 
The Home Office has now published Guidance on the Public Service Pensions and Judicial Offices Bill. The guidance includes information on how the Bill will implement changes across all the main public service pension schemes and the next steps following the Bill. The guidance includes information on:
 

what the government has published
the background and detail of the Public Service Pensions and Judicial Offices Bill
how the bill will implement changes across all the main public service pension
the next steps following the bill
additional information which may be helpful to members
 
The main points for advisers to be aware of:
 
Eligible members of the main public service pension schemes will have a choice of the benefits they wish to take for the remedy period. The remedy period runs from 1 April 2015 to 31 March 2022. The choice is for their accrual to be either under the older final salary schemes or the new 2015 career average revalued earnings (CARE) scheme. They will not have to make this choice until they take their benefits.
 
From 1 April 2022, when the remedy period ends, all those in service in the main unfunded schemes (i.e., teachers, civil service, firefighters, police, armed forces and NHS) will be members of the 2015 CARE pension schemes, ensuring equal treatment from that point on. The final salary schemes will close to future accrual for all members, however the final salary link remains for those benefits already accrued.
 
Those who retire before the deferred choice underpin is implemented will be offered a choice once the legislative changes have been made to implement the deferred choice underpin. The choice will be retrospective and backdated to the point that payment of pension benefits began. This will require a recalculation of benefit crystallisation events for Lifetime allowance (LTA) purposes and so could result in new or higher charges and so this would need to be factored into any decisions.
 
In terms of the annual allowance, pension inputs will need to be recalculated for the seven tax years of the remedy period. The Government guidance suggest that the vast majority are likely to see either no change in their tax position or receive a tax refund. However, this will require complex recalculations going back many years. Clients are likely to require assistance from advisers, particularly those who are high earners and subjecting to tapering.  Some members may face new or higher annual allowance charges. The consultation document stated that where this occurs they would only apply for the 4 tax years before the implementation whereas any tax refunds would apply for the full remedy period.
The mandatory scheme pays deadlines are being extended to allow members to use this option for earlier tax years where there are retrospective changes in the pension inputs. We would expect schemes to offer the same flexibility for voluntary scheme pays.
The revised pensions savings statements aren’t expected until October 2023.  Until then there is nothing that can be done, other than ensuring clients keep all information regarding their income, particularly those who are high earners.
Some members, including most members of Police scheme may see changes in their contribution rates for the remedy period and this may also impact their tax positions.
The Government estimates the cost of the rectification at approximately £17 billion, clearly a very expensive mistake and one that will require a great deal of work to fully implement.